Value stocks are shares where the price can look cheap relative to future value. The key word is ‘can’. Often, there are reasons why a share price looks low. Here I look at some UK value stocks that have caught my eye.
Spreading risk through diversification
Value stocks often face uncertain prospects. From changing market preferences to uncertain demand, what looks like a bargain can in fact be a value trap.
I would diversify my risk by splitting the £20,000 equally over 10 different names. I would also try not to concentrate my risk by overinvesting in any one sector. That’s why I would limit my pick to no more than two companies in a sector.
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High street names
Four of my picks for UK value stocks are familiar names from the high street.
Both Natwest and Lloyds have seen significant share price recovery lately. Nonetheless, I continue to see them as undervalued. UK housing demand is buoyant, which should help their mortgage books. I hope dividends will be increased, which should improve attractiveness. The government selling down its Natwest stake could also lead to fewer shares in circulation, boosting earnings per share. But both banks could suffer if the economy worsens.
The Morrison’s share price is only 12% off its year low. Pandemic costs have hit it. But I think the retailer’s partly vertically integrated supply chain and digital growth deserve more recognition. Increased competition could hurt profits, though.
Card Factory has jumped over 60% since I picked it in January as a share that might double my money this year. I still think it has potential as a reopening stock once lockdown restrictions end. But its price also reflects significant risks in my view. Cards have little growth potential and if banks don’t keep extending covenant waivers the company could be in financial difficulty.
2 UK value stocks I hold
Defence contractor Babcock has lost almost half its value since its year high. I like its government contracts and strong order book. But likely accounting restatements mean the shipbuilder’s share price remains all at sea. I own it but do see risks. Writedowns or a rights issue could yet push the price lower.
Unilever isn’t exactly cheap but I think its current price is good value for its high-quality collection of brand assets. It’s close to where it was a year ago, but the market outlook is clearer. Risks include heavy expenditure on environmental initiatives which might damage the bottom line.
Value in blue chips
Tobacco looks like a good category to me right now to hunt for UK value stocks. I continue to like both Imperial Brands and British American Tobacco. Their high single digit yields are attractive. But both have substantial debt and declining cigarette use in key markets is a long-term challenge.
I went off Shell last year due to its dividend cut, but the company still has a 3.6% yield. I reckon its shares could climb further if oil prices rise with economic recovery, though that might not happen. Similarly I would consider exposure to industry peer BP. Both blue chip names offer a way to benefit from possible jumps in oil price – if they materialise.
